Rally after US inflation data continues in Asia and Europe

The data released on the eve of the decline in inflation in the US in October caused a real euphoria in the markets. Inflation in annual terms (7.7%) returned to the level of January, that is, before the start of the war in Ukraine.

• In the US itself, the trading day after the publication of data on consumer inflation was the best in history among such days. The S&P 500 frontally rose by 5.5%: 96% of the index shares were in the green. The tech Nasdaq Composite rose 7.4%, while the broad Dow Jones Industrial Average rose 3.4%. The daily growth of all three indices is the highest since the exit from the coronavirus recession in 2020.
• Optimism was supported by statements by Fed officials that the rate hike step can be reduced. Traders - most likely prematurely - believed that in December the base rate would be raised not by 0.75, but by 0.5 percentage points. The yield on the most sensitive to the current policy two-year US government bonds fell by 25 bp, the dollar index fell by 2%.
• With the opening of Asian markets, growth spread to them: MSCI Asia Pacific rose by 4.6%, Tokyo Topix - by 2.1%, Shanghai Composite - by 2.5%. However, another powerful factor is at work here - for the first time, China has shown real signs of easing its zero-tolerance policy for coronavirus, softening quarantine requirements. This is also the reason for the 2% increase in oil prices.
• Quotes of futures for US indices in Asia indicate that growth will continue today. European indices are also growing - by 12:00 Moscow time, the German DAX rose by 0.7%, the French CAC 40 - by 1.1%.
• Even the crypto markets have stabilized as they try to recover from the FTX crash . Bitcoin rose by 14% the day before and continues to trade above $17 thousand, Ether - by 21%.

What do I get from this?

The current rally is hardly more than a temporary glimpse in the leaden clouds of the global economy. It fades against the backdrop of market losses in the context of the tightening of the Fed's policy: since the beginning of the year, the S&P 500 has fallen by 17%, the Nasdaq 100 by almost 30%. Both indexes are on track for their worst annual performance since the 2008 global financial crisis.

In any case, the Fed's December decision will depend on November inflation. If the trend is confirmed, the policy tightening will be eased but not reversed. So far, markets are confidently waiting for rates above 5% in 2023 (it was raised to 3.75–4% in early November).

The main losers now look too self-confident "bears" - stocks from the list of the most popular "shorts" rose by 11%. “Yesterday's session showed once again that market timing is not for the faint of heart,” Bloomberg concluded trading. - Operating independently, private investors lose to the indices precisely because of such days. At the same time, this is a hard lesson for position traders. A market crowded with sellers is the most subject to a collective flight, which means that the indices are able to rise faster than any single economic event deserves.